3 Levels of Risk Management
At the PMI Hungary Chapter international Art of Projects conference in Budapest this month, Rick Graham spoke about risk management in the globalised world. He talked about how Monte Carlo analysis is used to establish risk and how companies gather sophisticated data to make good decisions about the actions they need to take as a result of identifying risk.
Rick said that there are three levels of risk management that apply to projects.
1. Project risk
This is perhaps the most obvious. These risks do not recognise interdependencies and risks outside the scope of the project. Rick recommended doing Monte Carlo analysis at this level to identify project risk. He also talked about scenario building as a good tool for project risk identification and management, giving the example of Shell.
Shell was the only company which modelled the risk of the OPEC countries putting up the price of oil. Because of their analysis they were able to adapt their plants to deal with less refined oil and gained a two-year head start on the competition when the prices did go up.
Rick recommended “building limited models around sensitive areas”: in other words, not spending time on modelling when the risk is low or when it isn’t worth doing. Models and analysis help explain the risk you are taking at the project level in comparative terms, which helps set them in context for team members and stakeholders.
2. Project selection risk
At this level the question relates to how risk plays a part in making decisions about which projects should be started. The challenge here is whether the business just says yes or no to a project without looking at the overall position and the wider business requirements.
For example, a risky project may not be inherently bad for the business. If you always say no to risky projects you end up with a portfolio full of low risk but also probably low benefit projects that present reduced opportunities for the company.
This level links to the strategic objectives and how the deliverables will be achieved in the organisational context.
It should also include the risk of not doing or deferring the project, as that decision presents a different path forward for the business with its own challenges.
3. Project portfolio risk
This is where you start to look outside the projects as individual initiatives and start to gather rich data about the organisation’s approach to risk management as a whole.
Rick recommended doing Monte Carlo analysis at programme level to identify risks across dependent streams of work. He then talked about using this output to identify the right combination of projects to work on at portfolio level.
The problem I found with this model is that there isn’t any level that I can see where risks fit that fall outside the project but that are managed in some shape or form by the project manager. For example, dependencies on other projects – the risk that the other project may not deliver on time. Or the risk that the company might go bust – this is out of scope of the project but something like this could feasibly be on your risk register.
This model also assumes that you have a process to apply risk management to.
Rick said that you can only do portfolio level risk management if there is one single repository of project data. This isn’t the case in many businesses where project managers are based in functional silos and even if there is a PMO it serves one business unit and not the enterprise as a whole.
A spreadsheet is good enough for this: no need to invest in anything more complicated, he said. You can start to put some science behind your spreadsheet once you have everything documented in one place.
Do you measure and manage risk at these three levels? Let us know how it works for you in the comments.
Last time I looked at the process of cost management planning. Today I’m going to look at the next process in the cost management area, that of estimating. Let’s look at the inputs, tools and techniques and outputs for this process as defined by the PMBOK Guide® – Fifth Edition.
The point of this process is to estimate how much your project will cost overall, with as much science as possible. This involves looking at all the options and discounting those that aren’t appropriate, as well as polishing up estimates that will form your final budget.
Cost management and human resource plans
Take the cost management plan that you created in the last process as this talks about how costs will be managed and controlled. The most important part of it for this process is the section that defines how you are going to estimate and what level of accuracy you need to find.
The human resource plan will help you establish who is going to be working on the project and you can estimate the people costs based on that. Don’t overlook the reward and recognition elements – it isn’t just base salary that the project has to fund.
The scope baseline includes:
As you would expect, the project schedule has a bearing on your estimates. If you have to do things faster, you’ll need to put more people and more resources on the project. Take a look at who is doing the work and where it is being carried out and estimate accordingly.
How risky is your project? Take the risks into account when estimating the work. The higher the level of novelty or difficulty, the more you should put into your budget. If your risks have firm, costed mitigation plans then these should be taken into account too.
Enterprise environmental factors and organisational process assets
Yes, these turn up again. You’re looking for things that affect how you will estimate such as:
Tools and techniques
Wheel out your experts again – you are going to need them to help you estimate. Draw on their expertise and previous experience to help you establish how much things are going to cost. They can also advise on the best way to estimate certain activities.
There are several types of estimating that you can use on projects.
Check out these videos on:
You can also use three-point estimating.
This is where you set the levels for the management and contingency reserves.
A contingency reserve is there to account for cost uncertainty, so for example rework when a project deliverable isn’t up to scratch.
Management reserves are for unforeseen work that is added to the scope of the project. You’ll have to set an estimate for both of these reserve types and work out how and when you will call on them, and what the approval process will be.
Cost of quality
This is the place to document any assumptions about the cost of quality.
Vendor bid analysis
This involves looking at bids from vendors and assessing the responses. You might have to add up several quotes from different suppliers, add in contingency and include human resource costs. And, of course, tax, which most quotes will leave off.
Project management software and decision making techniques
You’ve got these tools available to you throughout the project. Your project management software will most likely be capable of managing project budgets – even if you only use a simple spreadsheet. I doubt anyone manages their project budget on paper any longer, but it is worth looking at the different tools available and finding one that you find easy to use.
As for decision making techniques, when it comes to finalising those budget estimates, you’ll need the input from the team so it helps to have some tools available to manage the discussion. Group facilitation techniques and those that help you come to agreement are key and include brainstorming and the Delphi technique.
Activity cost estimates
These are your understanding of how much each project activity will cost. You can do them as a summary or in lots of detail, as long as they cover the estimate cost for everything to do with that project task.
Basis of estimates
You’ll have to document how you have come up with your estimates. This is really useful, even if it seems like a headache, because at some point in the future someone is going to ask why you decided that X would cost Y and you can pull out your document and explain.
Project documents updates
Update all your project documentation to date with your cost estimate information. Let’s keep our records tidy now – it will save time in the long term.
Next time we pick up this series I’ll be looking at the process to determine your budget – what to do with your estimates now you have them.
Project Cost Management: Planning
Categories: cost management
Project cost management is the process that forces you to think about the procedures, policies and documents you need to manage your project finances. Many of these will already be in place but you’ll use the process to work out how you will apply them in your project and to make sure that you’ve got everything you need to be able to adequately manage, spend and control your budget.
As with all PMBOK® processes, there are inputs, outputs and the tools and techniques you need to get the job done.
Your project management plan
Your project management plan is critical for a lot of the processes, so it’s definitely something that you’ll be looking at here. In fact, your cost management plan is one of the sub-plans, so you should pull out your overall plan and start to think about how managing costs fits in with the rest of your project processes.
Your project charter
Your overall summary budget comes from the charter. You’ll use this figure, and any other bits of information from the charter, to develop a detailed project budget. Ideally your charter will give you lots of leeway each way because you can guarantee that the person who came up with the summary budget figure didn’t have as much information about how much the project will cost as you will in a few weeks.
Enterprise environmental factors and organisational process assets
These crop up all over the PMBOK. They really relate to how your company does business so they include things like:
The market conditions in your region and industry that may affect how you work
Tools and techniques
You’ve got to love your subject matter experts. When you need to put together your cost plan, experts are essential. They’ll be able to give you a view of what’s realistic, based on their prior experience, previous projects and their background.
You might have several different ways that the project could be funded and analysis will help you determine which is the best approach for this project. That’s not as complicated as it sounds – you’ve probably made ‘make or buy’ decisions before without realising that they formed part of this section of the process.
Who doesn’t like a good meeting? I’m surprised meetings don’t appear more often in the PMBOK. Putting together the cost management plan isn’t something that the project manager can do alone, so throw a meeting and invite some buddies along to thrash out how you are going to manage the cash.
The cost management plan
The output of all of these meetings, expert discussions is the cost management plan. The document sets out how you will apply the processes and principles necessary for managing the budget, any assumptions you’ve made and key decisions such as funding and timescales.
Check out these 7 things for your project’s cost management plan to check that you’re progressing along the right lines.
Next time in this series I’ll look at estimating project costs. In the meantime, what questions do you have about cost management? Let me know in the comments and I’ll answer them in a future article.
Project Budgeting in 60 seconds
How to demo your project deliverables
Demos and prototypes save your project time and money because you can get early feedback. I’ve talked about that before (in this video) but a couple of people have asked me for some more tips around setting up demos. And I’m very happy to oblige.
Let’s get on with it then, shall we?
The demo environment
Pick a nice room. By that I mean one that is large enough to fit everyone in comfortably and that’s got enough power sockets. Everyone brings a device along these days and they all need plugging in.
Understand the room’s heating and lighting controls. You don’t want people getting fidgety because they forgot their jacket – you want them concentrating on your amazing project deliverable.
If you are doing your demo via a web conference, get the software set up well before you expect everyone else to join the call. Test your microphone and headset and make sure you can share control of the screen with your co-presenters, if you have any.
Manage the expectations of the people in the room. Are you showing them a very rough outline of a product, a prototype that doesn’t quite work properly yet, a feature-rich almost-finished product, or the final thing? Set their expectations around what they are going to see so they aren’t disappointed when features don’t work or when you tell them it’s too late to change the colour because you’ve already ordered 30,000 in blue.
Review your objectives
What is it that you want people to get out of this demo? You can organise a demo or show people a prototype for a number of reasons such as:
Think carefully about why you want to do this demo and what outputs you are expecting. Do your demo attendees have the same understanding as you? It’s worth running through the objectives at the start of the meeting, just in case they don’t.
Practice, practice, practice. A complete dry run is a good idea. You want your audience to notice what you are saying, not get cut off halfway through your web conference because you don’t know how to use the meeting controls.
Walk through the demo in preparation, whether you are doing it in front of a ‘live’ audience or via a computer screen.
Prepare for questions
Be ready to answer questions. You are showing them your project deliverable in anticipation of some kind of feedback so expect them to have questions about what it does, how it does that and what else it could do. Be prepared to manage the ‘wouldn’t it be great if…’ type questions if you aren’t able to consider any modifications at this point.
Provide back up materials
Your demo attendees will hopefully be so excited about what you have built that they will want to share it with their teams. Have some materials ready so that they can do that: screenshots or handouts are great, but a test login (if software) or samples (if something else) and details of how to use it are better.
This gives them the chance to play with what you have created and if you want further feedback, let them know that you are open to their ideas and provide details of how to get them to you – direct contact, via an online request form or so on.
Demos and prototypes are a really powerful tool, especially if you are delivering a software product or a tangible item. End users particularly find this sort of workshop or meeting a very valuable session as they can see what they are getting. In my experience, showing someone a demo of your product helps build engagement too, as they start to get excited and they can see the idea become real.
However, make sure that if you are doing a demo that you are in a position to comment about when they are likely to get to access the final deliverable. There’s nothing worse than seeing a demo and getting excited about the project only to be told, or you can’t have it for 18 months. Set expectations carefully!
How have you used prototypes and demos? Let us know in the comments.
Elizabeth Harrin also blogs at A Girl’s Guide to Project Management.